Club Closings without Proper Membership Transfers Can Create Liability Issues

by Amber Maechler (Contributing Writer - Club Industry)

When it comes to closing or transferring ownership of a health club, an owner’s largest liability could be ignorance. Knowing what you need to do can help prevent lawsuits in the end. Although billing companies and consultants may be able to help club owners facilitate transactions and run reports, it is ultimately the responsibility of the individual owner to handle contracts, answer members’ questions and comply with the law.

Many club owners do not want to think about the possibility of having to close their facility, but proper planning on the front end will pay dividends if it ever happens, says Bob Riches, president of ASF International, Highlands Ranch, CO. 

ASF has assisted thousands of health club owners in managing their businesses for more than 40 years. Watching health clubs come and go has given Riches a unique perspective on why some transitions go smoothly while others end in litigation.

"The more communication, the better," Riches advises his customers. "It is preferred that they let us know in advance because we may be able to alleviate a lot of the headaches they may get along the way."

As soon as a club owner decides to close or transfer ownership, they should contact their billing company to see if reports can be run to show the business’s current liability, Riches says. They need to know if they are collecting fees in advance or arrears and what their liability is to members who have already paid for services, he says.

Matt Zagrodzky, vice president of Houston-based iGo Figure Software, says that club owners should be aware of their billing company’s billing cycle so they can cut off billing well before they close their business. Doing so prevents drawing the ire of members who paid for another month only to find the club closed. The billing portion of the iGo Figure system must be triggered each month for billing to occur, Zagrodzky says, which helps club owners retain control and prevent a billing from happening if they are going to close.

Equally essential as communication with the billing company is communication with internal staff and members, says Sid Nelson, senior vice president of Paramount Acceptance, Holladay, UT. He advises club owners to prepare their staff for the objections and questions they will receive from members. Staff should be told what to say and what contact information to give out to inquirers.

"The big key is knowing that everyone will respond with the same response to the member," Nelson says. "Every one of the staff members needs to have the number of the person who can respond to questions they can’t answer.”
Another critical step is to contact the state attorney general’s office.

"If the attorney general gets a complaint before they know about the closing, they may automatically think you are a criminal," Riches says.

Consumer protection laws for health club patrons vary by state, so club owners must be aware of the laws in every state in which they operate. Many states offer information for owners and members on their websites, along with contact information for advice and counseling.

Potential Legal Problems

Maryland is one of many states that take consumer protection of health club members seriously. As soon as the Maryland Attorney General’s office is informed of a club closing, it contacts the owner and asks him or her to provide documents that include membership lists, copies of contracts and amounts of any payments made, says Catherine Dowling, Maryland assistant attorney general.

"We try to work with them to make sure the process is as seamless as possible," she says. "We certainly want to work with the club owners. We are not trying to punish them."

If management at the fitness facility does not comply with the requests for information, someone from the attorney general’s office will visit the club in person. If the club still does not cooperate, they will look into what security is available and may place a claim against the club, Dowling says.

Club operators usually are cooperative, she says, but bad recordkeeping by some club owners can cause delays in submission of the proper documentation, causing a burden for the attorney general’s office and the members.
When club owners close one of their facilities, they may transfer members of the closed club to another of their facilities, but they must ensure they follow the laws in their state for doing so, Riches says. Each state has laws about how far club owners can move their clubs or where they can send members if they close. Transferring memberships to a club owned by someone else may be legal in some cases, provided it is within the state’s laws that define distance and services. For instance, if one club offered a certain type of exercise equipment and the new one does not, members might have grounds to terminate their contracts. Members who live close to the new club may be able to be legally transferred there, but others who live outside the defined distance could terminate their contracts based on distance.

When new owners take over a club or memberships are transferred, problems can arise if the new owners do not accept all contracts or if they make major changes to the existing contracts, says Steven Sakamoto-Wengel, deputy chief of Maryland’s Consumer Protection Division.

"This leaves members in limbo," Sakamoto-Wengel says.

If a club changes significantly from the time the contract was issued, members may be able to make a claim for restitution, Sakamoto-Wengel says. For instance, if the health club removes equipment, changes its operating hours, converts its racquetball courts or moves to a location too far from a member’s home, the owner could be required to let the member out of the contract and pay back liabilities owed for services that are no longer available.

However, club owners who keep the lines of communication open and are straightforward with their members often can market a move or closure in a positive way, Nelson says.

"How you deal with adversity is how you will be defined," Nelson says. "If you address things proactively, you will be remembered positively."